20080721-OSK-OIL & GAS (Overweight)

Our recommendations
In view of the dismal performance of the equity market, we have identified 2 KLCI component oil
& gas stocks for investors who would like some exposure to the sector, which we still have an
Overweight on. Our picks - Dialog and Kencana – are based on the criteria that the stocks have:
(i) strong financial positions; (ii) excellent execution track records; (iii) positive news flow over
the next 3 months, and (iv) prudent managements. Both Dialog and Kencana, which have no
changes in their business fundamentals, have underperformed the KLCI by 19% and 3%
respectively YTD. The recent pull-back in crude oil price should not affect the performance of
both companies over the next 2 years, given that their earnings are backed by strong
orderbooks as well as the nature and exposure of their business. In our view, oil price is likely to
stay high, largely due to supply factors. Our estimates for average crude oil price are
US$115/bbl for 2008 and US$100/bbl for 2009. If crude oil price retreats to below US$120/bbl
over the short term, a breakdown is likely. We maintain our Overweight call on the sector at this
juncture.